Robbing Peter to Pay Paul

Comingling funds can have broad repercussions.

Mary owned two small businesses. Through one she sold small trinkets and other novelty items. Through the other she was an event planner, helping people put together wedding and baby showers, as well as birthday and other kinds of parties. For various reasons, Mary had formed two separate companies, one for each business, and each had its own bank account.

Mary made a modest living operating her businesses. But the companies were not very consistent, each on separate feast-and-famine cycles. Over time, Mary became lazy about where she deposited funds and spent them from, even though she had individual accounts for each company.

One day, Mary received a cease-and-desist letter addressed to her novelty business from BigCo, a large producer of trinkets. BigCo claimed that Mary had improperly copied one of its designs, thereby violating its copyrights.  Although Mary disputed the claim, she decided that it was cheaper to settle with BigCo before it incurred attorney’s fees (which BigCo claimed it could recover) and discontinue that particular item, rather than “bet the company” on a fight over whether she was in the right. BigCo agreed to settle, but required that she disclose the finances for her novelty company so it could determine how much money she had made from the offending item, and thus how much it would demand as the settlement payment.

In reviewing her books in preparation for the disclosure, we discovered Mary’s less-than-stellar accounting practices. For example, she occasionally used a large payment from her last event planning client to pay for the most recent production of trinkets for sale by her novelty company.  We were concerned that, if BigCo peeled back enough layers of the onion, it would make a claim that Mary’s novelty company was worth more than it really was, or worse that the novelty and event companies were one and the same, thus putting the event planning company on the chopping block as well. Luckily, the most recent offending transfer was 5 months previous, and BigCo only required 3 months of bank statements.  We were able to provide the specific information BigCo requested—without revealing our concerns—and BigCo did not follow-up by asking for more information.

Others businesses often are not so lucky.  Robbing Peter to pay Paul—even if you own both companies or if you are comingling your own personal funds with company assets—is an excellent way to lose the protection of the “corporate veil.”  Call us today for a review of your books and records to see where you might be putting your company at risk.

Making payroll deductions and then failing to pass them along is never a good idea.

Alice worked for a Small Co, which provided her with health benefits. She had heard rumors that the company was having financial problems, but was never told more than that.

Recently Alice visited the doctor for a recurring problem with her feet. The doctor ordered some test to figure out what was wrong, as well as physical therapy for some exercises she could use to strengthen her legs and feet. Two weeks later, she received a call from the doctor’s office, telling her that the insurance company was denying payment for her most recent visit due to lack of coverage.

Confused about why she would not have coverage—her portion of the premium was deducted directly from her paycheck—Alice called her supervisor, who happened to be Small Co’s vice-president. He informed her that the company had switched over to a new insurance company and that there had been a short lapse in coverage that happened to coincide with all of her doctors’ visits and physical therapy. When she asked if the company would be reimbursing her for her out-of-pocket costs as a result of its mix-up, the vice-president told her he would get back to her. He then promptly stopped returning her calls and emails.

Alice contacted us to see if we could help. She was concerned that the company would not have the funds sufficient to pay her back for the medical bills.  We explained that a federal statute called ERISA governs employer-sponsored health insurance policies and that under that statute, the individuals who are the company’s decision-makers can be held personally liable if they failed to comply with their fiduciary duties to the employees.

We filed suit against the company, as well as the vice-president and another officer who we felt was also among the decision makers. Sure enough, the judge found them all liable—the company and the two officers personally—for Alice’s medical costs, including our attorneys’ fees and costs.  What should have been a claim for only a few thousand dollars, turned into a claim for almost four times that amount.

Robbing Peter to pay Paul is a never good business practice—especially when you’re taking funds from your employees’ paychecks and not forwarding them on to the people they belong to. If you are concerned about what your obligations to your employees might be, or if you think your employer is not fulfilling its obligations to you as an employee, give us a call so see if we can help resolve your concerns.

 

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Charles Wentworth
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Charles Wentworth
Charles Wentworth
Charles is an attorney in Glen Ellyn, Illinois. After graduating from the University of Utah, he clerked for Chief Justice John T. Broderick of the New Hampshire Supreme Court. He then became a litigation associate at Kirkland & Ellis LLP before opening his own office and partnering with Rick Lofgren. He lives just outside of Chicago, where he participates in community activities, including Boy Scouts and little-league baseball.